Exchange-Traded Notes At Heightened Risk Due to COVID-19's Market Volatility

Attorney Advising Disclaimer

While financial uncertainty is often volatility's best friend—2020's stock market rollercoaster due to COVID-19 kick-started volatility indexes such as VIX, though it has already fallen at least 33% from its March high—fiscal anxiety is a long-term horizon investor's worst enemy.

In 2018, the SEC warned investors about volatility-linked exchange-traded notes, writing, "You should understand that ETNs are complex and involve many risks for interested investors, and can result in the loss of your entire investment."

Credit Suisse's VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (symbol: XIV), for instance, contributed to massive portfolio losses for many investors when it lost 94% of its value in January 2018, while XIV and related volatility structured products and ETNs such as iPath S&P 500 VIX Short Term Futures ETN (VXX) proved so problematic that regulators such as FINRA stepped in to discipline brokers such as Global Arena Capital's James Flower for unsuitably recommending these products to retail customers.

Exchange-traded notes are senior, unsecured, unsubordinated debt securities that track an underlying index. Because of the various pieces that work together in ETNs, they are especially susceptible to market crashes and other economic calamity, as indicated by what recently occurred when UBS called for mandatory redemption of ETRACS ETNs which had already lost a majority of their values in the coronavirus collapse.


For this example, picture a house on stilts. Those stilts are the various products and investments which comprise and support a portfolio (house) and also include features such as leverage.

Because leverage amplifies losses during a down market, corresponding ETNs may be more susceptible to failure in times of increased volatility due to increased exposure and vulnerability to multiple components, not to mention the risk of an ETN issuer being unable to repay principal and potentially default on the bond during an economic emergency.

If you have invested with a broker or financial adviser who recommended an exchange-traded note (ETN) unsuitable for your specific risk tolerance level or long-term investment horizon that has lost value or teetered on the verge of collapse due to market volatility—just as Credit-Suisse's XIV ETN did in 2018 when it lost 94% of its value in less than a week—please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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